Consider a situation where you have sold something but you still haven’t received the funds. However, you have already bought something and need to pay for it. It creates a cash flow gap and this gap can be filled by loans which are known as fast commercial bridging loans. These are commonly used in real estate when people want to buy a property but they don’t have the funds yet as sale of their properties has yet to go through. These loans are secured loans which means a valuable asset is needed to get a bridging loan. A common example would be a property or land.
What Are the Uses of a Bridging Loan?
A bridging loan can be used for a number of reasons including:
Payment of tax bill
Settlements related to divorce
Development of property
Buying a property
Various business ventures
Buy to let investments
Property developers also make use of bridging loans at auction. This is due to the reason that a deposit needs to be made at auction for securing property at short notice and a bridging loan comes handy in such situations.
Property Development – Property developers and landlords regularly use bridging finance. They use it to fund projects on their properties. They will then sell these properties quickly in order to pay off the bridging loan.
Residential Bridging Loans – There are also residential bridging loans. These are increasingly becoming popular with homeowners who are moving house.
Bridging Loans – Various Types
Bridging loans are of two types including open bridge loan and close bridge loan.
Open Bridge Loan – These do not have a maturity/repayment date which simply means that you have the freedom to repay whenever you have the ability to repay these loans. These are typically given for up to a year but sometimes the term is even longer.
Closed Bridge Loan – These come with a fixed maturity/repayment date and the date of repayment is typically based on the expected date of repayment. These bridging loans are usually short-term and typically last anywhere from a few weeks to months.
As far as the cost of these loans is concerned, open bridging loans tend to be more expensive as compared to the closed loans due to more flexibility. Regardless of the type you choose, you need to carefully think about how you will repay the bridge loan.
Choosing the Right Bridge Loan
There are a number of factors you need to consider before you start comparing various bridging loan options. Here is a list of some of these factors:
Amount to Borrow: As far as the amount of a bridging loan is concerned, you can borrow anywhere from £5000 to more than £10 million.
Value of your property: The value of your property will determine the maximum amount you can borrow and interest rate on your bridge loan.
Time of borrowing: As far as the time period of borrowing is concerned, these loans can last anywhere from one month to 2 years.
Status of property: Whether a property has a mortgage or not will also affect the amount of money that can be borrowed as bridge loan. It will also have an effect on whether you will have a first charge or second charge loan.
What is the First Charge or Second Charge Loan?
First charge loans are so-called as the bridge loan is the first borrowing that has been secured against that property. Typically, mortgages are first charge loans. However, if there is no mortgage or any other outstanding borrowing on the property, a bridging loan can also be the first charge loan.
As the name implies, second charge loans are those where an additional loan is secured even when there is a mortgage or another loan outstanding against the property. Lenders that offer second charge loans typically require the first charge lender’s permission before adding a second charge on the property.
Unlimited amount of charges can be listed on a particular property as there is no upper limit.